The G-20's New Balance of Power: The Productive Economy Still Matters

As world leaders gather in Canada this weekend, the nations with the most influence won't be the high-tech mavens. Joel Kotkin on why traditional industries still matter in the post-information age.

Are we entering the post-information age?

For much of the last quarter century, conventional wisdom from some of the best minds of our times, like Daniel Bell, Alvin Toffler and Taichi Sakaiya—in both East and West—predicted that power would shift to those countries that dominate the so-called information age. At the time, this was the right call, but it may increasingly be, if you will, old news. Although there’s no question that iPhones and 3-D movies are nifty—and hedge funds generators of massive wealth for investors and operators—we now may actually be entering what might be called the post-information age.

As the ministers gather in Toronto this weekend for the G-20, we can see how overblown the efficacy of a virtual economy might be. The current star players on the field in terms of economic growth and fiscal strength generally derive their power not from information technology, media, or financial savvy but by the mundane but still important basic underpinnings of economic growth: agriculture, manufacturing and energy production.

This is true among both the advanced countries as well as the developing ones. The stars of the West are not the brainy Brits or the entrepreneurial “creative” Americans but places like host Canada and Australia, whose place in the world economy relies heavily on the production of raw materials like uranium, iron ore, oil, timber, grains, fish and beef. Sure, they have some cutting-edge companies, nice (often heavily subsidized) film industries, and lots of smart people (after all, my wife is from Montreal!). But it’s the basics that drive their economies.

So much so that Australia, braced by rising exports to Asia, has been growing well enough to let its interest rates rise, something that is all but unthinkable for the U.S. Fed, at least until the November elections. Due in large part to its commodity-based economy and more enlightened regulation, Canada’s banking system is widely considered the most stable in the advanced industrial world, with a rate of leverage 18 to 1 compared with the U.S.’s 26 to 1 and the EU’s scary 61 to 1. Budget deficits? Hardly an issue. Bank bailouts? Nary one.

The flip side of the Canada-Australia coin are the high-performers who now excel in the field most of our high-tech pundits—starting with Megatrends’ John Naisbitt 20 years ago—generally disdain: manufacturing. Naisbitt called manufacturing “a declining sport” and was roundly applauded by Wall Street and other sources of economic “wisdom.” The most obvious contrary example is China, the modern equivalent of 19th-century Britain’s “workshop of the world.” But other, faster-growing economies among the G-20—Brazil, Turkey, India and South Korea, for example—also are rising fast largely on the back of manufacturers.

None of this suggests that high-tech or information are unimportant. But by their nature industries like software are exceedingly mobile. In contrast, the basics in these rapidly growing economies involve large-scale investment and the presence of the right resources. It’s easier to move software development to Bangalore than soybean production or natural gas.

In any case, it’s not smart to give up the basics—unless perhaps you are Liechtenstein or Monaco—and hope to have enough money left to sustain your drive into high-tech industry. Do you really think that the rising industrial powers have any intention of ceding media, finance, and technology to Americans, Japanese or Europeans? I would not count on it.

History serves as an excellent guide here. Take the example of Great Britain—home of the Industrial Revolution—which should be considered a cautionary tale. In the 19th century and much of the 20th, even though the country depended on manufactured goods for its livelihood, British elite schools, financial institutions, and media all worked against “the needs of industry” to create what historian Martin Wiener has called “two unequal capitalist elites,” the more powerful of which had little interest in, and even disdain for, industrial activities. The “best” talent, and the most social prestige, favored the financial sector over the industrial. Production was particularly looked down upon: it was “the Cinderella of British industry.”

There are also more recent examples supporting the notion that hard work and attention to the basics still matter. In the 1980s, Japanese firms that were widely written off as “copycats” eventually became primary innovators, particularly in automobiles, semiconductors, and computer games. Koreans were often then dismissed by both Americans and Japanese as unimaginative imitators; today South Korea’s electronics and car companies are surging not only in America but across the world. Now they have their gaze fixed on biotechnology and videogames.

In the coming decades Chinese and Indian companies will seek to move from low-wage work to more specialized, and increasingly innovative, kinds of products—in everything from pharmaceuticals to fashion and finance. The enormous profits to be made from less “sexy” activities—ranging from manufacturing to call center and code writing—will provide the funds to invest in both the hard infrastructure and the necessary training to move decisively into ever higher-end activities.

This contempt for production underpinned the decline of Britain as a great power, and could prove disastrous in mid-21st entury America as well. In the America envisioned by the advocates of the “creative economy,” our productive facilities would serve mainly as tourist attractions, much as we now visit restored pioneer villages. The problem is that it may work for a small, highly educated class and some financial managers, but not for the vast majority of Americans.

In reality a more prosperous future is possible, but only if the country focuses both on developing the intellectual prowess of its citizenry and on maintaining the physical infrastructure necessary for key basic sectors like agriculture, energy, and manufacturing. A single-minded emphasis on nontangible industries—notably finance—is a dangerous delusion, as is particularly clear in both the Wall Street disaster of 2008 and the current devastation of the even more finance-dependent British economy and its exchequer.

Fortunately, there is still time for America—still by far the world’s pre-eminent economy—to adjust to the realities of the post-informational economy. We remain the world’s leading agricultural power, and global demand for food, particularly proteins, will soar as the global population expands from six to nine billion by 2050. Many of these people will be more affluent, and provide prime markets for such American exports as soybeans, nuts, fruits, wine, beef, and chicken. Only a small number of Americans may work on farms, but over 10 percent are involved in some way with the marketing, processing, financing and research of agricultural-related activities.

Similarly America can also enjoy the kind of energy-generated wealth that underpins Canada, Australia, and G-20 members Russia, Brazil, and Saudi Arabia. Our ruinous trade deficit in energy is largely a failure of will, faulty regulation and lack of proper incentives. In the short run, we have ample supplies of relatively clean natural gas—particularly in the Great Plains—as well as significant on-shore oil supplies and a prodigious capacity for renewable energy. In 10 years, with a pragmatic focus on these industries, we might not be an energy exporter but we could be fairly self-sufficient, perhaps only importing from our close Canadian cousins.

At the same time, there is no compelling reason why America needs to abandon industry. Unlike Europe we will have an expanding workforce and growing domestic market. The manufacture of hard goods, which requires a sophisticated infrastructure and is generally energy-intensive, could turn out to be relatively easy to salvage for American workers. Like agriculture, manufacturing directly may employ a relatively small number of people, but many others benefit from the service industries that depend on it. Manufacturers also boost the tech sector; roughly one in four U.S. scientists and engineers work for industry.

Although it may not be obvious to our trendy information-age pundits and their admirers among economic journalists, or perhaps some in the current administration, the U.S. is well-positioned to meet the requirements of the emerging post-information age. If we add our natural resource base and industrial capacity to our prodigious ability to innovate, the U.S. could not only compete against, but out-perform every major country in the G-20. The key now is summoning national and political will to exploit our advantages, assets that America sadly now appears to have in short supply.